$A still too strong: RBA

A critical take-away from Tuesday’s meeting was that the central bank wants Australia’s exchange rate to do even more of its heavy lifting given a still sub-trend economy. Photo: Louie Douvis

Christopher Joye

While Tuesday’s Reserve Bank of Australia board meeting was superficially a non-event, there are some important undercurrents swirling around the battling Aussie dollar, the rapidly ballooning local housing market, and diminishing overseas appetite for Australian assets.

For the avoidance of doubt, the central bank’s easing bias remains intact, although another cut is not imminent and remains data dependent. The RBA is pleased to see better global data and likely believes recent Chinese indicators put paid to the notion that the Middle Kingdom cannot deliver 7 to 8 per cent GDP growth.

A critical take-away from Tuesday’s meeting was that the central bank wants Australia’s exchange rate to do even more of its heavy lifting given a still sub-trend economy. Hence one RBA board member, John Edwards, claimed last week that the Aussie dollar was “still a bit too strong to help … in the transition we need to make”. On Tuesday Glenn Stevens chimed in with the assessment that the currency “remains at a high level”. Further falls “would help to foster a rebalancing of growth in the economy.”

The RBA understands that a condition precedent for any depreciation in the dollar is maintaining – given the market’s fickle ways – its “easing bias”. So it is not taking future cuts off the table.

Having said that, it is increasingly cognisant of the financial stability pickle it faces having cut the price of money to the cheapest levels in history. The NAB-owned UBank is now advertising a 4.48 per cent home loan rate, which compares to an average 7.6 per cent headline home loan cost since 1993.

Business and residential borrowing rates are below their GFC marks. Auction clearance rates in Sydney soared to 81.2 per cent last weekend, with house prices in Australia’s largest city up 7.5 per cent in the first eight months of the year.

The nation’s biggest mortgage broker, AFG, which has 10 per cent of the market, reported this week that it approved more home loans in August – $3.6 billion in total – than any month ever before.

Blind Freddy can see we are embarking on a housing boom. Where else are savers going to stash their money with the cash rate at 2.5 per cent and the most attractive term deposits offering a miserly 3.9 per cent?

Ironically for a central bank that has lambasted others for blowing house price bubbles, the longer Australian borrowing costs remain at these lows, the more likely families will start to think this is indeed a “new normal” that will persist indefinitely, as bond bandits would have us believe.

A final dynamic at play is a global cringe for Aussie assets that the RBA is probably not displeased to see (as it puts downward pressure on the currency).

Except, of course, if you are a Chinese oligarch looking to expatriate a bucket-load of cash to the relative stability of the sunburnt democracy. For the select few that fall into this camp, high-end Sydney property is a preferred destination. Just ask three recent vendors of homes for $52.5 million, $33.5 million, and $21 million to mysterious Chinese buyers.

The negative Australia bias was highlighted in Tuesday’s balance of payments data.

“Offshore investors now own close to 69.7 per cent of all Australian commonwealth government bonds, which is down from the peak of 79 per cent seen in the first quarter in 2012” says Skye Masters, a strategist with NAB:

She notes that “this moderation in buying interest is occurring at a time when the [federal government’s] issuance of [bonds] remains high” with the government expecting to raise an extra $60 billion of debt in 2013-14.

The major banks are one obvious buyer for their “liquid assets” books: but it is an expensive investment because the banks’ cost of funds is much higher than the yield on the bonds.

Over the weekend UBS added weight to the dump the Aussie dollar trade, which has been promoted for some time by Goldman Sachs.

UBS’s head of foreign exchange strategy, Mansoor Mohi-uddin, told his clients on Saturday that they should “stay short” the Aussie dollar, especially against the New Zealand kiwi.

“Being short [the Aussie relative to the Kiwi] offers a welcome immunity to each twist and turn of the Fed tapering debate,” Mr Mohi-uddin said.

“When Fed tapering actually gets under way however, switching into [Aussie] shorts would potentially offer even greater downside potential.”

It’s important to bear in mind that any currency weakness is good news for the real economy. And while the incoming data has been mixed, we are exporting more in real terms than we ever have before, iron ore prices are still around US$140 per tonne, consumer confidence, which has probably been depressed by dodgy government, is now above average, the jobless rate remains only 5.7 per cent, and the global economy, unsurprisingly, is looking healthier. So the outlook is hardly grim.

The Australian Financial Review

BY Christopher Joye

Christopher Joye is a contributing editor to The Australian Financial Review. He is a leading economist, fund manager and policy adviser who has previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of Smarter Money Investments.

BY Christopher Joye

Christopher Joye is a contributing editor to The Australian Financial Review. He is a leading economist, fund manager and policy adviser who has previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of Smarter Money Investments.